Rebuttal: Martin Wolf FT piece “Revaluing Reminibi”

Martin Wolf article in FT Revaluing Reminibi was an insightful piece of writing making an overwhelming case for the revaluation of the Yuan. I respectfully disagree with him and think that he too has given into the “crowd thinking” behind Yuan revaluation which is being led by Goldman, Geithner and a host of Investment banks in the US.

While I do not like to copy anything from FT and rather link it, just for making the point to Martins views, I am copying a part of the article. If FT requires me to remove it, I will remove it.

Quoting Martin:

China has controlled the appreciation of both nominal and real exchange rates. This surely is currency manipulation. It is also protectionist, being equivalent to a uniform tariff and export subsidy. Premier Wen Jiabao has protested against “depreciating one’s own currency, and attempting to pressure others to appreciate, for the purpose of increasing exports. In my view, that is protectionism”. The Chinese pot is calling the US kettle black.

Plausibly, the undervaluation is considerable, possibly as much as the “25 per cent on a trade-weighted basis and … 40 per cent against the dollar

Jim O’Neill, chief economist of Goldman Sachs, argues that the Chinese surplus is ceasing to be a significant factor. It is true that it has halved, as a share of GDP, since 2007. The question is whether this shift is structural or the result of exceptional and temporary measures. The World Bank still expects China’s current account to stabilise at high levels, with net exports about to make a positive contribution to growth. The world’s fastest-growing economy would be exporting unemployment. Mr O’Neill is ahead of himself

Come on Martin, when was the last time World bank got anything correct. China massive stimulus program of $500 bn is pulling in the world recovery at a pace which will surprise you, If you had the opportunity to look at the numbers. If you rather look at top line numbers, you would realize the growth in all basic metals have now nearly doubled or even more from their trough (Courtesy Chinese import demand), Oil is nearing $90 (Courtesy: China demand and future pull is getting discounted in the price), Imports in China are growing at a faster clip than exports (Courtesy: Chinese consumers wage growth is pulling a world consumption growth probably unseen after 1945 story of the birth of US consumer), China Infra sector is pulling commodities at the rate of knots. All these have now started to put the Chinese trade figures in deficit. Given these numbers, where is the case for revaluing the Reminibi? (Unless you want to make the point that Chinese numbers are all fraud an US numbers are the right numbers to go by?)

Martin again:

If the Chinese currency influences the dollar exchange rates of China’s competitors, as it surely does, it will definitely affect multilateral balances. Furthermore, one of the points I made in my (recently updated) book, Fixing Global Finance, is that real exchange rates also determine savings rates, not just the other way round. This is because governments care about GDP. The undervalued Chinese real exchange rate generated a contribution of net exports of 5.6 per cent of GDP between 2006 and 2008. The Chinese authorities had no reason to try to lower the surplus of savings at that time: it went into net exports. But when net exports plunged in 2009, knocking 3.9 points off GDP, the Chinese authorities acted to lower the savings surplus, by expanding domestic credit and promoting investment (see charts).

Martin, there are other reason why India and China have high savings rate. And it is the psychology and the basic tenet of the social fabric that exists in India and China. It has very little to do with the exports story. For example, India enjoys an average 30% steady savings rate for the last decade. China has also maintained a steady savings rate (25-34%) even with a steadily rising yuan (i.e. till 2008). It directly contradicts your view point that a rising exports means higher savings rate. Both these countries have maintained high savings rate despite all the global fluctuations. Does that not go to prove that both these countries have other drivers affecting savings rate and not just exchange rate policy?

For example, research by the researcher from Columbia university indicate that marriage has a huge role to play in higher savings rate in China as indicated by the following piece of work. In India, savings is a part and parcel of life. No government has even tried to force or cut down on savings. If they do, they will be booted out in next elections as forced cut in savings and rising consumption will lead to an immediate rise in prices which is a killer for any government in India.

So you views concerning exchange rate determining savings rate is theoretically possible but it is practically far fetched.

China has effectively and responsibly kept Yuan at 6.18 through out last year right through the recession in the US. No one complained then. China served as a buffer the world economy and more importantly the US. Today the very same nation has now turned its back on the country that has helped them in their hour of need and putting in a rather presumptuous claim on China currency. If I were the Chinese, I would feel stabbed by the US.

So may be they are manipulators as you put it.

Why is the great demand to revalue Reminibi coming alone from US?

Now this may surprise you but no other country other than the US have been as fuzzy about revaluing the Chinese currency as the US:

•Europeans have made passing references but hardly made a strong case for it. In fact Europeans are now factually the largest exporters to China even with a overvalued EURO and an apparently undervalued Yuan. Germans have tight wage control on their costs and hence are able to easily keep the exports to China at steady growth.
•Indians really have never made a noise about it. Tim Geithner was in India trying to persuade the Indians to support the US demand, but obvioulsy the Indians, asked Geithner to “Take a walk”.
•Australians are too buzy figuring out inflation. Nothing else seems to matter them.
•Coming to Timothy Geithner’s forceful request to revalue Yuan. What will it achieve? One the US will have immediate bump up in terms of exports from US to China. Second, Geithner will be allowed to run free to run his QE 2.0 and steal not just from the US but also from the Chinese. This nut needs to be weeded out of the world financial system otherwise he single handedly has the ability to bring down the house.

Appreciating the Yuan even by 25% will give temporary bump to US exports but that bump up will run out by 2011 leaving the US in far worse situation than it is now. China continues to have manufacturing Labor cost of one tenth that of US. Even revaluation of the Yuan will not alter the Chinese exports story.

The whole ruckus around the Yuan is not about the Chinese but rather about US plans to deflect any plans to bring about regulation in US financial industry. The solution to US deficit are two folds and they are mostly visible even to a BSchool graduate and I fail to understand how US congress is missing this:

•Labor reforms: US needs to cut down wages desperately. If they want to export and tap into India and China, they need Germany style clinical wage reforms. Wage cost form 40% of manufacturing in US while it forms 18% in China and 14% in India. Germans have managed to keep it at 20%.
•Financial Regulation: If there is one country that needs financial reforms, it is not India or China but Greenspan baby, the financial industry in the US. The model is flawed and needs urgent repairs. Leverage in the industry needs to brought down to sub 15x from the current 30x. Comex needs to either shutdown or bring down leverage and implement stringent position limits on all commodities. That place is a complete racquet’s for Banks and what goes on there has been justified in the form of price discovery.
•Cut down welfare state benefits: 30 mn more healthcare benefits to be extended. This is the kind of stuff that US is trying to implement while their nation as a whole is a debtor to the whole world with debt of $12trillion. It is like below poverty line family borrowing money to buy a Mercedes.

These are hard steps but I assure you they are the right path to economic recovery. Not currency repegging. US is a great country but it is now being ruled by a cabal of thieves and banks. It surely doesnt need to beg another country supposedly a poor country (per capita basis), to lend them free cash in the form of currency appreciation.

If it was not such a US centered policy, why have other countries not even bothered to make a claim on the yuan? Cause currency manipulation (if you may call it that) is a country sovereign right.

Given these facts, I do not think China will be forced to revalue the Yuan in 2010, but rather control inflation through monetary tools. China must stand for its own people rather than fund US bank mafia plans.